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Redrow pulls out of London as coronavirus changes homebuyer demands

The move coincided with a speech from the Prime Minister that the government is going to make the “most radical reforms of our planning system” since the Second World War

Redrow PLC -
Redrow Heritage homes

Redrow PLC (LON:RDW) said profits will be “substantially below” last year’s because of the effects of coronavirus and a scaling back of its operations in London.

With recent research indicating the coronavirus pandemic is changing house-buyers’ priorities towards more inside and outside space, wanting to live closer to green spaces and having better home workspace, the builder said it has decided to scale-back focus on the capital and would “target the group's future growth on the higher returning regional businesses” and its Heritage home designs.

This shift, which will see construction focus solely on the Colindale development in north-west London and existing sites under construction but not begin work on sites which were recently acquired, will result in financial provisions being made that will hit profit for 2020. Analysts expected this to be between £25mln and £30mln.

It also came on the same day that the Prime Minister announced a major loosening of planning laws to build more homes and said that the government would “build, build, build” its way out of the coronavirus crisis.

However, the FTSE 250 group said house sales have been strong in the five weeks since re-opening its sales offices in May, especially from buyers using the Government's Help to Buy scheme.

The net sales rate per outlet per week of 0.56 was only slightly lower than the 0.59 seen in 2019, which the housebuilder said reflected “strong pent-up demand”.

The company did not say anything about average selling prices and whether there has been a sharp hit from the coronavirus and the onrushing economic recession hitting the country. 

The FTSE 250 group ended its financial year on June 28 with £126mln of debt, versus £124mln cash a year ago, but has increased its bank overdraft to £350mln and obtained eligibility under the government’s coronavirus corporate financing facility, though it does not now think it will need to use it.

Some 4,032 homes were completed in the past 52 weeks, down 37% from the previous year, meaning revenue is expected to fall 36% to £1.34bn.

Construction is taking place at 124 developments and there are 113 sales offices currently open, the group said, with the order book standing at a record £1.42bn, of which more than two thirds in terms of revenue is contracted. 

Pointing to the resilience of its cash flow, the board has decided not to use the government's Job Retention Scheme and said it is “in the process of returning all payments received”.

Market reaction

The shares were down 7% to 431p by mid-afternoon on Tuesday.

Analysts at UBS said the strategic decision to scale back its London operations means sales from London will over time fall from the £300mln forecast in the 2021 financial year to £150-200mln by 2024.

Work in progress on sites that will not be developed will be written off, likely to the tune of £20-30m, UBS calculated.

"Importantly," the analysts said, "this is not a [net realisable value] provision similar to Crest Nicholson's last week and is equivalent to 1-2% of book value."

Surrey-based Crest took a £50mln land impairment and work-in-progress charge in its half-year numbers because of the impact on the NRV of its landbank of the price assumptions, which UBS said assumed house price deflation of -7.5% and -32% for commercial property.

Broker Peel Hunt cut its target price 27% to 675p as it expects Redrow to take £30mln worth of restructuring costs and impairments to existing investments and said it was more than halving it 2020 profit before tax forecast to £179mln from £408mln.

For 2021, Peel Hunt forecast PBT will be £226mln, down from £419mln, while 2022 estimates moves to £297mln from £430mln.

Analysts at Canaccord Genuity said that given the commentary in the update, "pricing is clearly holding up currently with no mention of any group-wide asset write-downs or assumed price falls".

They noted that the scaling back of London operations "is very specific to London developments, which have a different product mix and longer capital lock-up".

"We cut our profit estimates but the key issue is the nature of the recovery into FY2021 as the economy emerges from lockdown with a material fall in house prices being the key risk. Assuming pricing holds broadly firm, we believe the shares look attractive value over the medium term," was the Canaccord take.

Quick facts: Redrow PLC

Price: 465.6 GBX

LSE:RDW
Market: LSE
Market Cap: £1.64 billion
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